Obama's Asia visit: Do free trade deals really boost economies?
President Obama hopes to ink a US-South Korea free trade agreement Thursday. Trade deals among Asian countries are all the rage, but some say they may not have much impact.
With global trade talks stalled indefinitely, bilateral and regional deals are all the rage, leading to what some have called a "noodle bowl" of overlapping free trade agreements, or FTAs.
Such deals typically lower tariffs and improve market access between two or more countries. They also spark fierce debate, with backers promising eye-popping economic growth and opponents warning of massive job losses.
But a chorus of experts is saying such deals may not make much difference either way.
"There's an increasing acknowledgment that a lot of these preferential trade agreements do not deliver what they promised," said John Ravenhill, an expert on Asian trade at the Australian National University, at a recent talk in Taipei. "And the potential benefits are often grossly exaggerated – in actuality, they will make very little difference to people's welfare."
Mr. Obama hopes to ink an "adjusted" version of the US-South Korea free trade deal Thursday. The two countries signed the deal in 2007, but it has stalled in Congress amid flagging enthusiasm for more trade deals amid economic downturn, and objections from automakers and beef exporters, among others.
In Japan, Obama is expected to beat the drum for the newest trade grouping on the block (and the latest clunky acronym), TPP – for Trans-Pacific Partnership. Originally a free-trade bloc of Singapore, Chile, Brunei, and New Zealand, several big economies including the US want in on the action. Japan's center-left government is interested too, but already faces protests from farmers.
One factor behind the latest round of deal-making is Asia's growing economic clout. East Asia ( ASEAN, China, Japan, South Korea, Taiwan, and Hong Kong) will be the world's largest economic bloc by 2015, surpassing the North American Free Trade Area and the European Union, according to the US International Trade Commission.
But back in North America, experts still can't agree whether NAFTA itself had that much of an impact on its three member economies – the US, Canada, and Mexico. Some studies, including one from the Congressional Budget Office, have found only very slight effects on trade, growth, and jobs that can be directly attributed to the pact.
One reason why such trade deals may not matter much is that currency markets are so unstable. "In a world of free-floating currencies, you can have your 5 percent tariff advantage knocked out in a week," said Mr. Ravenhill.
Case in point: Wang Cheng-ching, the head of Taiwan's machinery association, said in an interview earlier this year that his group backed the trade deal the island signed this summer with China, because it could give them a slight edge, especially against their South Korean competitors. The deal will reduce tariffs on machinery exports to China from the current 6 percent to 9 percent, to zero.
But he said a much bigger concern had been the value of the South Korean won – which depreciated almost 50 percent against the dollar from early 2008 to early 2009, effectively giving Korean firms' exports a 50 percent discount (the won has since appreciated, but not back to early 2008 levels). "The change was very fast," said Mr. Wang, catching Taiwan's firms off guard.
Ravenhill said many Asian countries have rushed to sign deals simply out of a "bandwagon effect"; no one wants to be left out of the noodle bowl. There are now 90 free trade agreements in effect in Asia, up from 20 in 1997 – and more than 60 other deals are in the works, according to the Asia Regional Integration Center.
But some note that one of the main players behind Asia's deal-making frenzy – China – is signing pacts for primarily strategic, not economic reasons. One example, a free trade pact between China and the Association for Southeast Asian Nations [ASEAN] "was driven mainly by political motivations," said Cho Hui-wan, a trade expert at Taiwan's National Chung Hsing University.
"China wants to have harmonious relations with its neighbors," and the deal helped China soothe fears in southeast Asia over its economic and political rise, she said.
Because its aims are strategic, China is willing to accept less-than-ideal terms. "China is quite unique in this regard, because it has entered into these agreements as much for political as economic reasons," said Ravenhill. "So it's willing to give the lion's share of the benefits to its trading partners."
Such was the case with China's deal with Taiwan, which was seen as part of its plan to pave the way for political union by economic means. The first phase of the deal lowers tariffs on 539 Taiwanese exports to China, but only 267 Chinese exports to Taiwan. China repeatedly emphasized it was "giving advantage" to the island in negotiations.
China's deals have had knock-on effects, prompting Japan to sign its own deals with the Philippines, Thailand, and then all of ASEAN. The China-Taiwan deal has prompted South Korea to speed up its own trade talks with China, a development that Japan is in turn watching with concern.
Such worries may be misplaced. In a study last year on the "noodle bowl" effect, the Asian Development Bank found that only 22 percent of more than 600 firms polled in five Asian countries planned to take advantage of free trade agreement preferences – and that was a higher rate than previous studies had found, according to Ganeshan Wignaraja, the study's co-author.
Those firms that did plan to use FTAs were more likely to be huge, foreign-owned multinationals in wealthier countries, like Japanese automakers. Small and medium firms in poorer countries tended not to benefit much from such deals.
In interviews last year, Philippines exporters said tariffs weren't the main issue for them, but rather a maze of market-specific paperwork and export rules. "Non-tariff barriers is the thing that's affecting us," said Luis Sicat, chairman of a household accessories export group. "Countries like the US, and in Europe have requirements – sanitary, lab tests on products, lead content, and all these other things that make it difficult for us to comply." Big firms have an advantage because they are able to "absorb" the costs of compliance, Mr. Sicat said.
Allan Suarez, head of a association in Cebu of small and medium-sized exporters, agreed. "The problem is not the tariffs, it's the trade requirements," he said, citing requirements on fumigating wood exports to the US, or bans on lead and formaldehyde content in Europe. He said exporters needed more help from the government in understanding and complying with such rules.
Mr. Wignaraja said the ADB study found that trade deals were just one small factor for any given business – and often far from the most important one. "What matters really is back to basics – competitiveness at the firm level," he said. "All the other things are at the margin."
"So governments need to do more than just signing agreements, they need to do a lot of support to help firms take advantage of these deals," he said. "A lot more has to be done if we're going to live in a world of FTAs."